Monday, 19 January 2009

Mandelson: tax not a "litmus test" of fairness

Pushing up tax rates for high earners is not a “litmus test of social justice”, Business Secretary Peter Mandelson told Saturday’s Fabian New Year Conference.

Instead, tax policy should be guided by the economic circumstances and national needs in play at different times, he argued – with the new 45p top rate necessary for everyone to pay their “fair share of the burden” during difficult economic times.

Speaking at the session ‘Fairness in a Recession’, Lord Mandelson began by reminding that his renowned quote about New Labour being “intensely relaxed about people getting filthy rich” had come with an oft-neglected caveat: “so long as they pay their taxes”.

TUC General Secretary Brendan Barber later delivered his own rejoinder to the quote, saying: “But the trouble is, you know, they don’t”.

Addressing the session, Lord Mandelson said: “Equality of opportunity has to be created, because it is the foundation of a fair society and a more equal society.

“It [Labour] does it, in my view, creating equality of opportunity much more effectively than seeking to impose equality of outcome through government policy.”

The Business Secretary argued that globalisation demanded a “social contract” – a version of the “reformed European social model” that ties liberal economics into a social democratic framework.

He went on to say: “There’s a tendency, especially during a downturn, to make the incomes of the wealthy a proxy for fairness – that if we are reducing the incomes or the wealth of the wealthy, that is somehow making us a fair society. And I think it is very important that we don’t get ourselves into thinking that tax therefore, and tax on the highest paid in our society, is a litmus test of social justice…

“I think taxation is dicatated by what economics circumstances require us to do and the needs of the country, what they require at that time.”

Lord Mandelson contrasted “the politics of resentment” – which he branded “corrosive” - with a politics based on “aspiring to lift people up”. He reeled off a list of ways Labour had “pursued social justice” between 1997 and 2008 without raising the top rate of tax.

Yet he acknowledged a “progressive taxation system” is vital to fund public services and public goods such as retraining for unemployed workers, and other “levers of equality”.

“We shouldn’t have a problem with high pay for high performance; I see nothing wrong at all with giving rewards for those where you are acknowledging or rewarding excellent performance,” said Lord Mandelson. But he added that genuine rewards for high performance “in many cases is precisely what we haven’t seen in many reaches of the financial services industry over the last 10 years.”

Barber welcomed the Government’s active response to the financial crisis and economic downturn, but placed a different emphasis to Mandelson on tax.

He noted a 2006 Ernst & Young study that found billionaires resident in the UK at that time were paying an effective rate of only 0.01% to the Exchequer.

Urging action on tax as part of the Government’s fairness strategy, including action on tax havens, Barber added: “I do not think that this is about the politics of envy but I do think it is about the politics of equity.”

Rachel Reeves, a former Bank of England economist and Labour PPC for Leeds West, contrasted the PBR’s injection of funds equivalent to 1.3% of GDP into the UK economy with the approximately 5% of GDP contained in Obama’s stimulus package.

As expectations of the scale of the recession worsen, Reeves highlighted the need for a “New Deal-type package” of investment, jobs and training – with March’s budget providing an opportunity for another “substantial injection of cash into the economy”.

She also called for the Bank of England to be given the authority to examine “a range of unconventional policies” including quantitative easing, a controversial policy involving boosting the supply of money in the economy.

James Forsyth of the Spectator said that the approximate doubling of the number of people earning within the top tax band that had taken place over the last 10 years had to be “dealt with”.

Arguing for regulatory reform that is “pro-market and not pro-business”, Forsyth noted it was “quite incredible” there would almost certainly be no criminal prosecutions in Britain stemming from the financial crisis, especially when set against numerous Securities and Exchange Commission investigations in the USA.